October 6, 1977

REVENUE REGULATIONS NO. 12-77

SUBJECT : Substantiation Requirement for Losses Arising from Casualty,

Robbery, Theft or Embezzlement

TO : All Internal Revenue Officers and Others Concerned

Pursuant to the provisions of Section 326 in relation to Section 4 of the National
Internal Revenue Code of 1977, these regulations are hereby promulgated to govern the
manner of reporting losses arising from casualty, robbery, theft, or embezzlement, for
income tax purposes. cdtai

SECTION 1. Nature of deductible losses. — Any loss arising from res, storms or
other casualty, and from robbery, theft or embezzlement, is allowable as a deduction
under Section 30(d) for the taxable year in which the loss is sustained. The term
"casualty" is the complete or partial destruction of property resulting from an
identi able event of a sudden, unexpected, or unusual nature. It denotes accident, some
sudden invasion by hostile agency, and excludes progressive deterioration through
steadily operating cause. Generally, theft is the criminal appropriation of another's
property to the use of the taker. Embezzlement is the fraudulent appropriation of
another's property by a person to whom it has been entrusted or into whose hands it
has lawfully come.
SECTION 2. Requirements of substantiation. — The taxpayer bears the burden of
proving and substantiating his claim for deduction for losses allowed under Section
30(d) and should comply with the following substantiation requirements:
(a) A declaration of loss which must be led with the Commissioner of
Internal Revenue or his deputies within a certain period prescribed in
these regulations after the occurrence of the casualty, robbery, theft
or embezzlement.
(b) Proof of the elements of the loss claimed, such as the actual nature and
occurrence of the event and amount of the loss.
SECTION 3. Declaration of loss. — Within forty- ve days after the date of the
occurrence of casualty or robbery, theft or embezzlement, a taxpayer who sustained
loss therefrom and who intends to claim the loss as a deduction for the taxable year in
which the loss was sustained shall le a sworn declaration of loss with the nearest
Revenue District O cer. The sworn declaration of loss shall contain, among other
things, the following information:
(a) The nature of the event giving rise to the loss and the time of its
occurrence;
(b) A description of the damaged property and its location;
(c) The items needed to compute the loss such as cost or other basis of the
property; depreciation allowed or allowable if any; value of property
before and after the event; cost of repair;
(d) Amount of insurance or other compensation received or receivable.
CD Technologies Asia, Inc. 2018 cdasiaonline.com
 Evidence to support these items should be furnished, if available. Examples are
purchase contracts and deeds, receipted bills for improvements, and pictures and
competent appraisals of the property before and after the casualty.
SECTION 4. Proof of loss. — (a) In general. — The declaration of loss, being one
of the essential requirements of substantiation of a claim for a loss deduction, is
subject to veri cation and does not constitute su cient proof of the loss that will
justify its deductibility for income tax purposes. Therefore, the mere ling of a
declaration of loss does not automatically entitle the taxpayer to deduct the alleged
loss from gross income. The failure, however, to submit the said declaration of loss
within the period prescribed in these regulations will result in the disallowance of the
casualty loss claimed in the taxpayer's income tax return. The taxpayer should therefore
le a declaration of loss and should be prepared to support and substantiate the
information reported in the said declaration with evidence which he should gather
immediately or as soon as possible after the occurrence of the casualty or event
causing the loss.
(b) Casualty loss. — Photographs of the property as it existed before it was
damaged will be helpful in showing the condition and value of the property prior to the
casualty. Photographs taken after the casualty which show the extent of damage will be
helpful in establishing the condition and value of the property after it was damaged.
Photographs showing the condition and value of the property after it was repaired,
restored or replaced may also be helpful.
Furthermore, since the valuation of the property is of extreme importance in
determining the amount of loss sustained, the taxpayer should be prepared to come
forward with documentary proofs, such as cancelled checks, vouchers, receipts and
other evidence of cost.
The foregoing evidence should be kept by the taxpayer as part of his tax records
and be made available to a revenue examiner, upon audit of his income tax return and
the declaration of loss.
(c) Robbery, theft or embezzlement losses . — To support the deduction for
losses arising from robbery, theft or embezzlement, the taxpayer must prove by
credible evidence all the elements of the loss, the amount of the loss, and the proper
year of the deduction. The taxpayer bears the burden of proof, and no deduction will be
allowed unless he shows the property was stolen, rather than misplaced or lost. A mere
disappearance of property is not enough, nor is a mere error or shortage in accounts.
Failure to report theft or robbery to the police may be a factor against the
taxpayer. On the other hand, a mere report of alleged theft or robbery to the police
authorities is not a conclusive proof of the loss arising therefrom.
SECTION 5. Determination of amount deductible. — (a) In general. — The amount
of casualty loss deductible is limited to the difference between the value of the
property immediately preceding the casualty and its value immediately thereafter, but
shall not exceed an amount equal to the cost or other adjusted basis of the property, or
depreciated cost in the case of property used in business, reduced by any insurance or
other compensation received.
(b) Method of valuation. — (i) The fair market value of the property immediately
before and immediately after the casualty for purposes of determining the amount of
casualty loss deductible under this section shall be ascertained by an impartial but
competent appraisal. This appraisal must recognize the effects of any general market
CD Technologies Asia, Inc. 2018 cdasiaonline.com
 decline affecting undamaged, as well as damaged property, which may occur
simultaneously with the casualty in order that any deduction under this section shall be
limited to actual loss resulting from damage to property.
(ii) The cost of repairs to the property damaged is acceptable as evidence of the
loss of value if the taxpayer shows that (1) the repairs are necessary to restore the
property to its condition immediately before the casualty, (2) the amount spent for such
repairs is not excessive, (3) the repairs do not cover more than the damage suffered,
and (4) the value of the property after the repairs does not as a result of the repairs
exceed the value of the property immediately before the casualty.
(c) Examples.
The application of this section may be illustrated by the following examples:
(i) Property not used in business:

Cost or adjusted basis P18,000.00

Value of property before casualty 15,000.00
Value of property after casualty 10,000.00
Insurance recovered 3,000.00

The casualty loss is computed as follows:

Value of property before casualty P15,000.00
Value of property after casualty 10,000.00
–––––––––
Difference P5,000.00
========

Loss to be taken into account for

purposes of Section 30(d):
lesser amount of property
actually destroyed (P5,000)
or adjusted basis of property
actually destroyed (P18,000) P5,000.00
Less: Insurance received 3,000.00
––––––––
AMOUNT OF LOSS DEDUCTIBLE P2,000.00
=======
(ii) Property used in business:
(A) Total destruction . — In case of losses arising from total destruction of
property used in business (ordinary asset) the net book value (cost less accumulated
depreciation) immediately preceding the casualty should be used as the basis in
claiming losses, also to be reduced by any amount of insurance or compensation
received.
To illustrate:

Assume that —
Acquisition cost of property P10,000
CD Technologies Asia, Inc. 2018 cdasiaonline.com
 Accumulated depreciation 5,000
Insurance recovered 2,500
Amount deductible is computed as follows:
Acquisition cost P10,000
Less: Accumulated depreciation 5,000
–––––––
Amount of loss suffered P5,000
Less: Amount recovered through insurance 2,500
–––––––
AMOUNT DEDUCTIBLE P2,500
======

(B) Partial destruction. — In case of losses arising from partial damages of

property used in business, the replacement cost to restore the property back to its
normal operating condition should be used for purposes of computing deductible
losses, but in no case shall the deductible loss be more, than the net book value of the
property as a whole immediately before the casualty. The excess over the net book
value immediately before the casualty should be capitalized subject to depreciation
over the remaining useful life of the property.
To illustrate:

Assume:
Acquisition cost P100,000
Accumulated depreciation 90,000
––––––––
Net book value P10,000
=======
Estimated remaining useful life 5 years
Replacement cost of damaged portion P20,000
––––––––

In the above example, the loss deductible for tax purposes would be limited to
P10,000 which is equal to the net book value of the whole property:
Net book value P10,000
Replacement cost 20,000
–––––––
Excess of replacement cost to be
capitalized P10,000
======

Consequently, the new cost basis subject to depreciation charges over the
remaining useful life of the property which is ve (5) years, would be P20,000 as shown
hereunder:
Net book value before casualty P10,000
Add: Excess of replacement cost over
CD Technologies Asia, Inc. 2018 cdasiaonline.com
 book value 10,000
–––––––
New cost basis P20,000
======

Yearly depreciation —
P20,000
–––––––
5 years = P4,000

(iii) Farm losses. — In the case of losses sustained, by farmers, the following
rules shall apply:
(a) Loss of livestock. — The loss sustained in the death of livestock shall
be allowed as a deduction to the extent of the acquisition cost only if no
inventories are taken into account in determining the income from the business of
farming.
If inventories are taken into account in determining the income from the
trade or business of farming, no deduction shall be allowed for losses sustained
during the taxable year upon livestock or other products, whether purchased for
resale or produced on the farm, to the extent such losses are re ected in the
inventory on hand at the close of the taxable year.
(b) Other farm losses. — Where ground is prepared and planted or stocked
as in case of sugar, coconut and other agricultural plantations, orchards,
shponds and other farms and its value is completely destroyed by the over ow
or seepage of water from natural causes, the cost of the preparation and planting
or stocking up to the time of the disaster shall be deductible loss in the year in
which it is incurred.

SECTION 6. Determination of amount deductible — robbery, theft and

embezzlement losses. — The amount deductible in respect of robbery, theft and
embezzlement loss shall be determined consistently with the manner prescribed in the
preceding section for determining the amount of casualty loss allowable as a
deduction. In applying the provisions of the preceding section for this purpose, the fair
market value of the property immediately after the theft shall be considered to be zero.
This section does not apply to losses reflected in the inventories of the taxpayer.
Example:
In 1969, B purchases for personal use a diamond brooch costing P40,000. On
November 30, 1975 at which time it has a fair market value of P35,000 the brooch was
stolen. The brooch was fully insured against theft. A controversy develops with the
insurance company over its liability in respect of the loss. However, in 1976; B has a
reasonable prospect of recovery of the fair market value of the brooch from the
insurance company. The controversy is settled in March, 1977, at which time B receives
P20,000 in insurance proceeds to cover the loss from theft. No deduction for loss is
allowable for 1975 or 1976; but the amount of the deduction allowable for the taxable
year 1977 is P15,000, computed as follows:
Value of property immediately before theft P35,000
Less: Value of property immediately after theft -0-
CD Technologies Asia, Inc. 2018 cdasiaonline.com
 –––––––
Loss to be taken into account (P35,000 but
not to exceed adjusted basis of P40,000
at the time of theft) P35,000
Less: Insurance received in 1977 20,000
–––––––
Deduction allowable for 1977 P15,000
======

SECTION 7. Year of deduction . — If a casualty occurs which may result in a loss

and, in the year of such casualty or event, there exist a claim for reimbursement with
respect to which there is a reasonable prospect of recovery, no portion of the loss with
respect to which reimbursement may be received is sustained until it can be
ascertained with reasonable certainty whether or not such reimbursement will be
received. Whether a reasonable prospect of recovery exist with respect to a claim for a
reimbursement of a loss is a question of fact to be determined upon an examination of
all facts and circumstances. Whether or not such reimbursement will be received may
be ascertained with reasonable certainty, for example, by a settlement of the claim, by
an adjudication of the claim, or by an abandonment of the claim. When a taxpayer
claims that the taxable year in which a loss is sustained is xed by his abandonment of
the claim for reimbursement, he must be able to produce objective evidence of his
having abandoned the claim, such as the execution of a release.
SECTION 8. Effectivity of these regulations. — These regulations shall be
applicable to losses sustained or arising from casualties, robbery, theft or
embezzlement occurring on or after the approval of these regulations.
With respect however to such losses arising before the approval of these
regulations, the declaration of loss required under these regulations should be led
within forty-five days from the approval of these regulations.

ALFREDO PIO DE RODA, JR.

Acting Secretary of Finance

Recommended by:

EFREN I. PLANA
Acting Commissioner

ANNEX
B.I.R. Form No. 1746
DECLARATION OF LOSS ARISING FROM CASUALTY,
ROBBERY, THEFT OR EMBEZZLEMENT
Name of taxpayer: _____________________________________________________
Address: ____________________________________________________________
T.A.N. ______________________________________________________________
A. NATURE OF LOSS
CD Technologies Asia, Inc. 2018 cdasiaonline.com
 1. Event causing the loss ______________________________________________

2. Date of occurrence of event __________________________________________

3. Description of damaged property and its location (an itemized list should be attached)
________________________________________________________________

4. Facts and circumstances surrounding the loss of the property:

5 Name of insurance company or other entity from which recovery claim may be made:
_______________________________________________________________

B. VALUATION OF LOSS
1. Nonbusiness property

Original cost or adjusted basis P____________

Value immediately before casualty P____________ ____________

Value immediately after casualty ____________ ____________

Amount of insurance recoverable ____________

2 Business property — Total destruction

Acquisition cost of property P____________

Accumulated depreciation ____________

Amount of insurance recovered ____________

3 Business property — partial damage

Net book value immediately before P____________

Amount of replacement cost to restore the property

back to its normal operating condition ____________

CD Technologies Asia, Inc. 2018 cdasiaonline.com